©

2014 Accounting Advanced Higher Solutions Finalised Marking Instructions

 Scottish Qualifications Authority 2014 The information in this publication may be reproduced to support SQA qualifications only on a noncommercial basis. If it is to be used for any other purposes written permission must be obtained from SQA’s NQ Assessment team. Where the publication includes materials from sources other than SQA (secondary copyright), this material should only be reproduced for the purposes of examination or assessment. If it needs to be reproduced for any other purpose it is the centre’s responsibility to obtain the necessary copyright clearance. SQA’s NQ Assessment team may be able to direct you to the secondary sources. These Marking Instructions have been prepared by Examination Teams for use by SQA Appointed Markers when marking External Course Assessments. This publication must not be reproduced for commercial or trade purposes.

2014 ADVANCED HIGHER ACCOUNTING MARKING CONVENTIONS CONVENTION

EXPLANATION

MARK(S) ON CANDIDATES PAPER

Extraneous

Items entered which should not be in the answer

−1E

Consequential

If a figure in a question is wrong, any further calculations are awarded marks if correct, as a consequence of using that figure

C

Nomenclature

The details in an account are wrong/ missing

−1N

Dates

The date of an entry is wrong/missing

−1D

Complete Reversal

All the ledger entries are made the wrong way round

R eg

The question is marked as if correct and then the total mark is divided by 2 Plus/Minus Rule

If an entry is shown correctly it is awarded the mark (+) If the same entry then appears in another part of the question the mark is deducted (−) ie no mark is gained and there is no penalty

Penalty

eg Correct entry £60,000 Sales in the Trading Account – Mark awarded 1 (+−) Wrong entry £60,000 Sales also entered in the Balance Sheet – Mark deducted −1 (+−)

The answers given are more than required (4 given instead of 3) and one of them is wrong A heading is wrong/missing from a final account The answer is correct but not given in the format requested ie the question asks for an account or a statement and a list is given

Page 2

Total Mark = 12 Divided by 2 Mark awarded = 6

-1P

GENERAL INSTRUCTIONS

1

Assess pencil figures and working. If the script is predominantly in pencil refer to the Principal Examiner.

2

A maximum of 10% of marks gained on any individual question may be deducted for untidy work and poor style. This penalty should only be applied in exceptional circumstances.

3

Work which has been deleted gains no marks, even if correct. Exceptional cases may be drawn to the attention of the Principal Examiner.

4

Consequential errors MUST NOT be penalised, subject to the marking instructions for each question.

5

Mark workings whether or not they are incorporated into the final answer. Deduct a penalty of −1 mark per question for working which is not incorporated in the final answer.

6

Incorrect figures, supported by adequate workings – award marks for any correct operations performed.

7

Incorrect figures, not supported by adequate workings – lose awards, unless the marking instructions specify otherwise. If arithmetic error lose 1 mark.

8

EXTRANEOUS ITEMS – see instructions for specific questions.

9

If right and wrong – give value of award where figure is correct, deduct value of award where figure is wrong (cross reference +/− against relevant figures).

10

Indicate awards given for each item next to the appropriate figure eg £15001 In essay type questions indicate the marks awarded beside the point made by the candidate – NOT IN THE MARGIN. Sub-totals for each section should be indicated and encircled, eg5/6 Final totals should be clearly indicated and easy to check, eg Q1 = 42/50.

Page 3

2014 Accounting Advanced Higher Solutions Question 1 SECTION A (a)

Net Cash Flow from Operating Activities Net Profit before Interest and Tax Non Cash Adjustments Add Depreciation for the year

£000s 208 155 363 2 365

Add Loss on sale of Vehicles Less Profits on sale of assets: Factory Machinery

50 10

Changes in Working Capital Increase in Stock (28 – 45) Decrease in Debtors (30 – 15) Increase in Creditors (10 – 18) Net Cash Inflow from Operating Activities

−17 15 8

60 305

6 311

5 2 2

2 2

1 1 1 (16)

(b)

Cash Flow Statement for the year ended 31 December year 3 £000s £000s Net cash Inflow from Operating Activities 311 Returns on Investments and Servicing of Finance Debenture Interest (10 + 23 − 20)

−13 298 −33 265

Taxation Paid (24 + 35 − 26) Capital Expenditure and Finance Investments Purchase of Fixed Assets (300 + 150 + 45) Sale of Fixed Assets (150 + 10 + 8)

−495 168

Equity dividends paid Ordinary dividends paid

−327 −62 −30 −92

Management of liquid resources and financing Issue of ordinary shares Issue of Debentures Increase in Bank during the year

70 60

130 38

4 4

4 4

2

3 2 1 (24) (40)

Page 4

Working Notes £000s 120 23 30 35 208

Net profit before tax and interest Unappropriated profit Add Debenture Interest (20 + 3) Ordinary Dividend Corporation Tax Depreciation for year: Machinery Delivery Vans

135 20 155

1 2 1 1

(5)

1 1

(2)

Profit or Loss on Asset Sale

100 150 50 (1)

50 50 0 10 10 (1)

Delivery Vehicle 20 10 10 8 −2 (1)

(1)

(1)

(1)

Factory Cost of Assets sold Less Depn on Disposal NBV Cash received Profit/(loss) on sale of assets

100

Entry in statement

Machinery

Page 5

(6)

Question 1 PART B (a) Dividend Yield Ordinary dividend per share × 100% Market price per share (b)

Dividend Cover Net Profit – Preference Dividends Dividends on Ordinary Shares

7p(1) × 100% (1) £1·20 5·83% £300,000(1) – (5% × 150,000)(1) (500,000 × 7p)(1)

2 1

292500 35000 8·36 times (c)

Earnings per share Net Profit – Preference Dividends No of Ordinary Shares

£300,000(1) – (5% × 150,000)(1) 500,000

2 1

292500 500000 £0·59 per share Or accept 58·5p (d)

Price/earnings Ratio Market price per share Earnings per Share

£1·20 or £1·02 £0·59 58·5p 2·03 times 2·05 times

1 1 (10) (50)

Page 6

Question 2 PART A Realisation Account Factory Premises Office Equipment Delivery Vans Stock Debtors VAT Bank (factory premises) Bank (Office Equipment (60% × 50,000) Capital – Brown (Delivery Van) Capital – White (Delivery Van) Bank (Delivery Vans) Bank (Stock) Bank (Debtors 15000 – (15000 × 10%) Bank (VAT) Discount Received Realisation Expenses Loss on realisation Brown 2/5 × 2300 Grey 2/5 × 2300 White 1/5 × 2300

Dr 250,000 50,000 28,000 17,000 15,000 8,000

Cr

265,000 30,000 12,000 8,000 18,000 12,000 13,500 8,000 600 1,400 920 920 460

Balance 250,000 300,000 328,000 345,000 360,000 368,000 103,000 73,000 61,000 53,000 35,000 23,000 9,500 1,500 900 2,300

Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr Dr 1,380 Dr 460 Dr 0 Dr

1

1 1 1 1 1 1 1 1 1

1 (11)

Capital Account − White Balance Current Account Realisation – Delivery Van Loss on realisation Loan

Dr

Cr 55,000

3,700 8,000 460 20,000

Balance 55,000 51,300 43,300 42,840 62,840

1 1 1 1 (4) (15)

Page 7

PART B Application and Allotment Account Bank (120,000 × 40p) Bank (10,000 × 40p) Bank (100,000 × 60p) – 4,000)) Preference Share Capital 1 Share Premium

Dr

Cr 48,000

Balance 48,000 44,000 100,000 20,000 0

1 1 1

Balance 48,000 44,000 100,000 119,900 120,250

1 1 1 1 1

500

Balance 80,000 100,000 99,500 100,000

2 1 1 1

Cr 20,000 250

Balance 20,000 20,250

1 1

Cr 19,900

Balance 19,900 100 0

1 1 1

Balance 100 400 0

1 1 1

Balance 350 750 250 0

1 1 1 1

4,000 56,000 80,000 20,000

1 Bank Account Application Application (10,000 × 40p) Application and Allotment First and Final call (99,500 × 20p) James Brown

Dr 48,000

Cr 4,000

56,000 19,900 350

7% Preference Share Capital Account Application and Allotment Call (100,000 × 20p) Forfeiture of Shares J Brown

Dr

Share Premium Account Application and Allotment Forfeiture of Shares

Dr

First and Final Call Account Bank Preference Share Capital Forfeiture of Shares

Dr

Cr 80,000 20,000

500

20,000 100

Forfeiture of Shares Account First and Final Call Preference Share Capital James Brown

Dr 100

James Brown’s Account Bank (500 × 70p) Forfeiture of Shares Preference Share Capital Share Premium

Dr

Cr 500

400

500 250

Cr 350 400

(25) (40)

Page 8

Question 3 (a)

Goodwill (i)

(ii)

Shares purchased

= 80% × 50,000 =

Cost of shares Value of company purchased Goodwill

= 40,000 × £2 = = 59,800 × 80% =

Minority Interest

= 59,800 × 20% =

40,000 £ 80,000 47,840 32,160

1

11,960

2

1 2

(6)

(b)

(i)

Post acquisition profits

(ii)

Unrealised Profits Cost of Goods sold to River plc Add mark-up 50% Selling price

= 6820 – 4800

= 2,020 × 80% =

Unrealised profits on goods not sold = 1,800 × 40% =

1,616

3

3,600 1,800 5,400

2

720

1

(iii)

Minority Interest

= 20% × 61,820 =

12,364

1

(iv)

Cash in transit

= 3,000 – 2,250 =

750

1

(v)

Profit and Loss Account Balance Profit Add post acquisition profits

85,950 1,616 87,566 720 86,846 6,432 80,414

1 1

Less unrealised profits Less Goodwill (32,160 × 20%) w/o Profit & Loss Account balance

1 1 (12)

Page 9

(c)

Consolidated Balance Sheet as at 30 September Year 3 £ Fixed Assets (441,150 + 70,000) Goodwill (32,160 – 6,432) Stocks (5,900 + 3,200 − 720) Debtors (5,600 + 5,240) Banks (8,800 – 720 + 750)

Creditors (3,000 + 3,500) Accruals (500 + 150)

6,500 650

Less Long Term Liabilities Debentures (15,000 + 10,000)

Financed by Ordinary Shares of £1 each Share Premium Profit and loss balance Minority Interest

400,000 40,000 80,414 12,364

£ 511,150 25,728 8,380 10,840 8,830 564,928

7,150 557,778 25,000 532,778

2 2 3 2 3

1 1 2

2 2 1 532,778 1 (22) (40)

Page 10

Question 4 (a)

(b)

Auditing • Is the independent examination of the financial statement and accompanying notes of a plc by a suitably qualified person • Is an expression of opinion on the financial statements of an enterprise/produce a report • It is carried out to establish that the final records prepared provide an accurate and fair view of what has actually taken place • Auditing should ensure that the information produced is not misleading • Smaller companies (with turnover less than £5·6m and Fixed and Current Assets less than £2·8m) are exempt from an external audit.

(6)

The rights and duties of an auditor are: Auditors have the following duties: • To give a true and fair view of the company’s state of affairs and its profits or losses for the year under audit • To ensure that financial statements have been properly prepared in accordance with the Companies Acts • Providing a report to the members on the position of the company.

(c)

(d)

Auditors have the following rights to: • access at all times, to the company’s accounting records and other documents • to require directors and employees of the company to provide explanations and information they consider to be necessary to complete the audit • to attend any general meeting and speak on matters concerning them.

(10)

The Audit report produced by the Auditor will contain several distinct sections: • Title of the report – who has it been produced for eg Shareholders or creditors • Details of financial statements audited • Details of accounting standards used as a basis for their assessment; • Details of the depth of the audit providing stakeholders with a clear understanding of what was within the scope of the audit • Conclusion as to whether the company has o met its statutory obligations in accordance with the Companies Act o presented accounts which show a “true and fair” view of the actual activities carried out by the company during the financial period • A section which details any significant discrepancies between the auditor’s and director’s view of the accounts. These will be presented in such a way that stakeholders can make informed decisions regarding the accounts.

(8)

The benefits of an independent external audit to stakeholders are that the audit gives credibility to the financial information provided by the board in the following ways(2): • • •

Preventive control – employees are more likely to take extra care preparing financial statements if they know their work will be checked. Detective control – errors may still exist in preparing financial statements and an audit may find these errors and allow them to be corrected before publication Reporting control – should errors be discovered which the directors are unwilling to correct the auditor can make the stakeholders (shareholders and creditors) aware of the situation by referring to it in the audit report. This lets stakeholders know that there is a possibility that the financial information provided may not be reliable.

(6) (30)

Page 11

Question 5 (a)

FRS 3 – Reporting Financial Performance The purpose is to ensure that financial reporting is made in a consistent and understandable manner. It • • •

Changed the way performance is reported Aims to ensure that entities highlight a range of important financial performance components helping users to understand the performance achieved in a period requires a layered format for the profit and loss account which will highlight a number of important financial components i. Results of continuing operations (including acquisitions) ii. Results of discontinued operations iii. Profits and losses on the sale or termination of an operation iv. Extraordinary items

The standard requires that • a statement of total recognised gains and losses to be shown – this is a primary financial statement that includes the profit and loss for the period together with any movements in reserves • a note of historical profits, showing profits and losses of entities which have revalued assets on a more comparable basis with those entities that have not.

(10)

FRS 10 Purpose is to ensure that purchased goodwill and other intangibles are written off in the financial period in which they are depleted. Purchased goodwill is the cost of an acquisition less the total fair value of the assets acquired after adjusting for liabilities also acquired. Purchased goodwill should be included in intangible assets and written off (amortised) against profits over 20 years or less. Internally generated goodwill should not be capitalised and other intangibles should only be capitalised and written off against profit if their market value can be easily ascertained.

(10)

FRS 18 Accounting Policies This FRS requires accounting policies to be consistent with accounting standards, Urgent Tasks Force Abstracts and Companies Legislation This FRS deals mainly with the selection, application and disclosure of accounting policies. Its objective is to ensure that for all material items: • the accounting policies adopted by an entity adopts the accounting policies most appropriate to its particular circumstances for the purpose of giving a true and fair view; • the accounting policies adopted are reviewed regularly to ensure that they remain appropriate, and are changed when a new policy becomes more appropriate to the entity’s particular circumstances; and • sufficient information is disclosed in the financial Statements to enable users to understand how they have been implemented • The entity should judge the appropriateness of accounting policies to its particular circumstances against the objectives of i. Relevance ii. Reliability iii. Comparability iv. Understandability

(10) (30)

Page 12

(b) The Director’s Report may contain information on the following: Area covered

Significance

A review of the business at the year end (1), including market position (1), principal business activities (1), and changes in these (1)

Provide stakeholders with an overview of the company’s activities over the year (1)

The difference between the balance sheet value and the market value of fixed assets (1) (especially land), if significant (1)

Informs shareholders of the net book value of the assets compared with the actual value and indicates where there are significant differences (1)

Comments on significant post balance sheet events (1)

Makes stakeholders aware of any significant payments which may have to be made in the near future (1)

Likely future developments (1)

Informs stakeholders of what the organisation is aiming to do in the future (1)

Research and development projects (1)

Informs stakeholders of what the organisation is aiming to do in the future (1)

Recommended dividends and transfers to reserves (1)

Informs shareholders of proposed dividends for discussion at AGM (1)

Directors’ names and interest in company (including share and debenture holdings) (1)

Informs stakeholders of who the directors are and their holdings in the company (1)

Disclosures of donations to charities, political parties etc (1)

Allows shareholders and possible investors to decide whether they agree with the donations etc made and to decide whether to continue to do so or invest in the company (1)

Health, safety and welfare of staff (1)

Inform shareholders of any health and safety issues which may affect the running of the company. (1)

Disability policies (1)

Informs shareholders (1)

Creditors’ payment policy (1)

Allows prospective suppliers to see what the company’s payment policy is (1)

Environmental issues (1)

Informs shareholders or possible investors of their firms’ policies on environmental issues and allows them. (1)

(10) (30)

Page 13

SECTION B Question 6 PART A Project A Year 1 2 3 4 5 6 Wind up (b) (a)

(a)

(a)

(i)

(ii)

(iii)

(c)

Net Cash Flow Cumulative 40 40 80 120 80 200 80 280 80 360 40 400 −48 352 352 Less Initial Investment (Year 1) Net Present Value

(a)

(c)

36 64 57 51 45 20 −24 249 240 9

For Information: 15% DF NPV 0·870 35 0·756 60 0·658 53 0·572 46 0·497 40 0·432 17 0·432 −21 230 240 −10

4 Years 37 Days (8/80)*365 37 If Project A is terminated at payback future cash inflows would be foregone – (2) £72,000 for Year 5 and £40,000 for Year 6.(1) Early termination is only likely if a new forecast suggests that the cash inflows for the later years may not materialise Average Profit

1 1 1 1 1 1 2 2

18·67

3

3

(352 − 240)/6

1

ARR or

7·78% 46·68%

(18·67/240)*100 (18·67/40)*100

2

IRR

13·38%

12% + 9(9 + 10) × 3% (1) (2) (1)

4

(i)

(iii)

NPV

Payback

Project B Net Cash Flow Cumulative Year 40 1 40 60 2 100 100 3 200 100 4 300 60 5 360 40 6 400 −48 Wind up 352 352 Less Initial Investment (Year 1) (b) Net Present Value (a)

12% DF 0·893 0·797 0·712 0·635 0·567 0·507 0·507

Payback

Average Profit

12% DF 0·893 0·797 0·712 0·635 0·567 0·507 0·507

3 Years 321 Days

18·67

NPV 36 48 71 64 34 20 −24 248 240 8

15% DF 0·870 0·756 0·658 0·572 0·497 0·432 0·432

NPV 35 45 66 57 30 17 −21 230 240 −10

(88/100) (8/80)*365

3

(352 − 240)/6

1

ARR or

7·78% 46·68%

(18·67/240)*100 (18·67/40)*100

2

IRR

13·32%

12% + 8(8 + 10) × 3%

4

Page 14

Project C Year 1 2 3 4 5 6 Wind up Initial cost Cash Profit

Project D Year 1 2 3 4 5 6 Wind up Initial cost Cash Profit

(d)

(d)

(i)

(ii)

Net Cash Flow 30 20 15 10 10 5 −12 78 60 18

Net Cash Flow 20 30 30 10 10 10 −14 96 70 26

Cumulative 30 50 65 75 85 90 78

Cumulative 20 50 80 90 100 110 96

Choose Projects A and D (1) as they give the best NPV and IRR combinations (2). The basis for this choice takes into account the time value of money (2) and avoids foregoing cash flows which may be lost upon early (payback) termination (2).

Max 3 2

£112 + £26 = £138m

PART B Variances (i) Material Cost (ii) Material Price (iii) Material Usage (iv) Variable Overhead Cost (v) Variable Overhead Expenditure (vi) Variable Overhead Efficiency

£4,380 £5,580 −£1,200 −£100 −£2,500 £2,400

Favourable Favourable Adverse Adverse Adverse Favourable

(55000*1·5)−78120 (55800*1·5)−78120 (55000−55800)*1·5 (11000*2)−22100 (9800*2)−22100 (11000−9800)*2

2 2 2 2 2 2 (50)

Page 15

Question 7 PART A (a)(i)

Equivalent Production Statement for Month 6 Units Inputs: Work in Progress Transferred In Materials Added

Good Output Normal Loss Work in Progress

%

Materials

Labour

%

Overheads

3000 15000 12000 30000 26500 100% 1500 2000 100%

Equivalent Units Produced (ii)

%

26500 100% − 2000 50%

26500 100% − 1000 50%

26500 − 1000

28500

27500

27500

Labour − £18,000 £1,250

Overheads − £13,500 £800

£19,250 27,500 £0·70

£14,300 27,500 £0·52

3 3

Cost per Equivalent Unit Produced in Month 6

Transferred In Costs for Month Work in Progress Less Scrap Value of Normal Loss Equivalent Units Produced Cost Per Equivalent Unit Total Cost per Unit

Materials £22,500 £8,400 £3,375 −£1,500 £32,775 28,500 £1·15

£2·37

1 2 1 1

3 1 (15)

(b)

Finishing Process Account for Month 6 Kg Inputs Work in Progress b/f Transferred In Materials Labour Overhead Abnormal Gain Outputs Normal Loss Good Output Work in Progress* *Work in progress Materials Labour Overhead

2000 × £1·15 1000 × £0·70 1000 × £0·52

Price

3,000 15,000 12,000

£1·50 £0·70

500

£2·37

1,500 27,000 2,000

£1·00 £2·37

£ £5,425 £22,500 £8,400 £18,000 £13,500 £1,185 £69,010

1

£1,500 £63,990 £3,520 £69,010

1 2 1

1 2

£2,300·00 £700·00 £520·00 £3,520·00 (8)

Page 16

Question 7 PART B Contract 1 Account for year ended 31 December Year 1 £ £ £ Work certified complete 180,000 Work complete, but not yet certified 40,000 220,000 Less Costs: Materials sent to site 50,500 Less balance at 31 December 5,200 45,300 Less scrap sales 1,300 44,000 Wages paid 60,000 Add accrued wages 3,720 63,720 Direct site expenses 9,280 Prime Cost 117,000 Plant depreciation(£20,000−£16,000) 4,000 42,610 Company Overheads 38,610

Cost of contract to date Notional Profit Profit Taken (Profit and Loss) Profit carried forward

159,610 60,390 20,130 40,260 −

1 1

1 1 2 1 1 1

82,500 × 117 (1) (117 + 63 + 70) (2)

(180/540)*60,390

2 3

2 1 (17) (40)

Page 17

Question 8 Ortiz (a)

(b) (ii)

(c)

(c)

Knowles 100 50 £50

1

Cont pu Machine hrs Cont per m/h Priority

£25 2 £12·50 2

£27 1 £27·00 1

£50 5 £10·00 3

2 1

Cont pu Materials kg Cont per kg Priority

£25 2 £12·50 1

£27 4 £6·75 3

£50 5 £10·00 2

2 1

Selling price Variable cost Cont pu

(b) (i)

(c)

50 25 £25

Telford 60 33 £27

(i)

(ii)

M/h priority Hours allotted Units required

Ortiz 2 8,000 4000

1 3,000 3000

Knowles 3 19,000 3800

Units required Kg per unit Total kg required Kg available Additional kg required

4000 2 8000

3000 4 12000

3800 5 19000

1 8,000 4,000 4000

3 8,000 2,000 3000 1000

2 19,000 3,800 3800

(iii) Mats priority Kg allotted Units produced Units required (c)(i) Reduction

(d) (i)

(d) (ii)

Ortiz

Telford

Mats priority Kg allotted Units Required

1 8,000 4000

3 2,000 500

Knowles 2 25,000 5000

Units required Hours per unit Total hours required Hours available Additional hours required

4000 2 8000

500 1 500

5000 5 25000

2 8,000 4,000 4000

1 500 500 3000 −2500

3 21,500 4,300 3800 +500

(d) (iii) Hours priority Hours allotted Units produced Units required (c)(i) Effect

Telford

Page 18

Total Hours 30,000 3

39000 35000 4000

3

Total Kg 35,000 2

Total Kg 35,000

3

33500 30000 3500

3

Total Kg 35,0000 2

(e) Option 1 Units produced Cont per unit Total contribution Add royalties

Ortiz Telford Knowles 4,000 3,000 3,800 £25 £27 £50 £100,000 £81,000 £190,000 (4,200 units × £15)

Less Fixed Costs Profit Option 2 Total contribution from Option 1 Extra units Cont per unit Extra contribution New total cont Less Fixed Costs Profit

Ortiz Telford Knowles £100,000 £81,000 £190,000 1,000 £5 £5,000

2,000 £15 £30,000

1,200 £55 £66,000

Advice: Choose Option 1 as it gives the greatest profit

1 £371,000 £63,000 £434,000 £100,000 £334,000

1 2

£371,000

1

2

3 £101,000 £472,000 £150,000 £322,000

3 2

2 (17) (40)

Page 19

Question 9 (a)

Since the difference between marginal and absorption costing is in the treatment of the fixed costs, the only financial information common to both statements are: • • •

(b)

sales for the period variable costs (labour, materials, variable overhead) incurred during the accounting period as these are not affected by the way fixed costs are treated. Max 4

2 1 1 1

In absorption costing statements, but not in marginal: • • • • •

fixed costs are charged to the cost of sales section at pre-determined rates calculated using estimated fixed costs and an estimated base (labour hours worked, units produced, etc) consequently the amount charged is likely to be different from the actual fixed costs incurred the difference will represent an over-or under-absorption and final profits are adjusted to take this difference into account stock unit costs will include an estimated fixed cost per unit in addition to the variable cost per unit so the total value of opening/closing stock will be higher than marginal for any given level of stock. Max 8

2 2 2 2 2

In marginal costing statements, but not in absorption: • • • • • (c)

(i)

• • • •

only variable costs are charged to cost of sales stock unit costs are based upon variable costs only so the total value of opening/closing stock will be lower than absorption for any given level of stock the value of contribution will be shown (sales less the variable (marginal) cost of sales) actual fixed cost for the period will be deducted from contribution to give the profit. Max 8 profit will differ between marginal and absorption when production and sales levels for a period are different stocks will probably either decrease or increase – when stocks are falling absorption costing will show a lower profit than a marginal and vice versa when stocks remain constant each method will show the same profit over the life of a business where stocks begin and ends at zero there will be no difference due to method chosen. Max 6 for (c) (i)

Page 20

2 2 2 2 2

2 2 2 2

(c)

(ii)

Absorption Costing • •

aids initial product pricing decisions. (Cost plus pricing) all jobs (or short-term project) costs must use absorption costing to ensure that all costs are covered by the price charged.

2 2

Marginal Costing • • •

useful for short term decision making in respect of special price contracts within current capacity. contribution per unit may be used to assess the breakeven point for comparison with market potential – aiding production decisions. contribution per limiting factor may be used to help prioritise products for manufacture and to assist decision-making in respect of make or buy, etc. Max 6 for (c) (ii)

2 2 2 Max 10

Page 21

Question 10 (a)

(i)

Attainable Standards are set when allowances are made for: • • •

normal losses and spoilage supplier price changes labour problems such as absenteeism, disputes, wages demands, low morale or shortages of skilled labour Max 4

2 2 2

Using attainable standards: • • • •

(a)

(ii)

2 2 2 2

Flexible Budgets: • • • • • • •

(b)

will only give rise to adverse variances in areas where remedial action will be successful will not overburden managers with too many adverse variances in areas where remedial action is unlikely to be successful should lead to high morale in a workforce which is recognised to be performing well should lead to a stable staff situation (staff turnover low) Max 4 Max 6 for (a) (i)

set budgets for different levels of activity levels may relate to a change in cost behaviour for example where a step up in fixed costs is necessary to enable a higher level of production or where variable cost changes such as overtime wages or bulk discounts for materials occur take account of variable and semi-variable costs compare actual costs with budgeted costs for actual output so are better for evaluating performance Max 6 for (a) (ii)

2 2 2 2 2 2 2

Steps in preparation of master budget: • • • • • • • •

decide on aims for the period with regard to long term strategy identify limiting factors to determine potential level of production prepare functional (and subsidiary) budgets for sales, production, administration and distribution as well as (possibly) research and development prepare a capital expenditure budget taking account of available finance prepare the cash budget co-ordinate and review all budgets and revise as necessary consolidate the individual budgets into a master budget (profit and loss account) present to management for approval Max 8 for (b)

Page 22

2 2 2 2 2 2 2 2

(c)

(i)

• • • • • •

(c)

(ii)

• • • • • • •

Activity based costing (ABC) is based upon identifying the commercial activities (ordering, material handling, set-up of production line, etc) which are necessary to service the production of products or supply of services these activities have cost drivers that give rise to the cost (set-up costs may be driven by the number of production runs undertaken) the total cost of each activity (the cost pool) is used to produce an absorption rate per driver which is then used to allocate the activity costs to products/services based upon their use of the cost drivers used in preference to ‘traditional; absorption costing by modern, multi-product companies Max 6 Multi-product breakeven analysis is required when a company produces more than one product which requires the product mix to be considered when calculating the breakeven point by using the relative percentage of sales of each product to calculate a weighted contribution per unit of sales which is used to calculate the breakpoint in the normal way the result will provide a good estimate of the breakeven level of activity as long as the production mix does not change any change in the production mix will require a recalculation of the breakeven point Max 6

2 2 2 2 2 2

2 2 2 2 2 2 2 Max (10)

[END OF MARKING INSTRUCTIONS]

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©

2014 Accounting Advanced Higher Special Instructions Finalised Marking Instructions

 Scottish Qualifications Authority 2014 The information in this publication may be reproduced to support SQA qualifications only on a non-commercial basis. If it is to be used for any other purposes written permission must be obtained from SQA’s NQ Assessment team. Where the publication includes materials from sources other than SQA (secondary copyright), this material should only be reproduced for the purposes of examination or assessment. If it needs to be reproduced for any other purpose it is the centre’s responsibility to obtain the necessary copyright clearance. SQA’s NQ Assessment team may be able to direct you to the secondary sources. These Marking Instructions have been prepared by Examination Teams for use by SQA Appointed Markers when marking External Course Assessments. This publication must not be reproduced for commercial or trade purposes.

2014 Accounting Marking Conventions CONVENTION

Extraneous

Consequential

Nomenclature Dates

EXPLANATION

Items entered which should not be in the answer If a figure in a question is wrong, any further calculations are awarded marks if correct, as a consequence of using that figure The details in an account are wrong/ missing The date of an entry is wrong/missing All the ledger entries are made the wrong way round.

Complete Reversal

The question is marked as if correct and then the total mark is divided by 2 If an entry is shown correctly it is awarded the mark (+)

Plus/Minus Rule

If the same entry then appears in another part of the question the mark is deducted (-) ie no mark is gained and there is no penalty

MARK(S) ON CANDIDATE PAPER

-1E

C

-1N -1D R Eg total mark = 12 Divided by 2 Mark awarded = 6 Eg Correct entry £60,000 Sales in the Trading Account – mark awarded 1 (+/-) Wrong entry £60,000 Sales also entered in the Balance Sheet – mark deducted -1 (+/-)

The answers given are more than required (4 given instead of 3) and one of them is wrong

Penalty

A heading is wrong/missing from a final account The answer is correct but not given in the format requested ie the question asks for an account or a statement and a list is given

Version 1

Page 2

-1P

General 1. Asses pencil figures and working. If the script is predominantly in pencil refer to the Principal Examiner. 2. A maximum of 10% of marks gained on any individual question may be deducted for untidy work and poor style. This penalty should only be applied in exceptional circumstances. 3. Work which has been deleted gains no marks, even if correct. Exceptional cases may be drawn to the attention of the Principal Examiner. 4. Consequential errors MUST NOT be penalised, subject to the marking instructions for each question. 5. Mark workings whether or not they are incorporated into the final answer. Deduct a penalty of -1 mark per question for working which is not incorporated in the final answer. 6. Incorrect figures, supported by adequate workings – award marks for any correct operations performed. 7. Incorrect figures, not supported by adequate workings – lose awards, unless the marking instructions specify otherwise. If arithmetic error lose 1 mark. 8. EXTRANEOUS ITEMS – see instructions for specific questions 9. If right and wrong – give value of award where figure is correct, deduct value of award where figure is wrong (cross reference +/- against relevant figures). 10. Indicate awards given for each item next to the appropriate figure eg £1,5001. In essay type questions indicate the marks awarded beside the point made by the candidate – NOT IN THE MARGIN. Sub-totals for each section should be indicated and encircled, eg 5/6 Final totals should be clearly indicated and easy to check eg Q1 = 42/50

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Award marks lost

Penalties applied

QUESTION 1 Part A (a)

Working notes for net cash flow from Operating Activities: Net profit before tax not £120 Debenture interest not £20 Debenture interest on newly issued debentures not £3 Ordinary dividends not £30 Corporation tax not £35

1 1 1 1 1

Depreciation machinery not £135 Depreciation of Vehicles not £20

1 1

Profit or Loss on Sale of Assets: Correct figure gains 1 mark Correct treatment gains 1 mark

Changes in Working Capital: 1 1 1

Increase in stock not £-17 Decrease in Debtors not £15 Increase in Creditors not £8 Net Cash Inflow from Operating Activities not labelled Extraneous items eg Appreciation or Purchase Items in wrong section eg Changes in Working Capital in non-cash adjustments give marks to correct figures

Page 4

-1 -2 max -4 -2 once

Award marks lost

Penalties applied

QUESTION 1 (continued) Part A Items in wrong section lose entry mark (b)

Net cash Inflow from Operating Activities wrong, not consequential on (a) Returns on investments and Servicing of Finance: Debenture Interest due Jan 1 Year 3 wrong/omitted Debenture interest not £23 or omitted Debenture interest due wrong/omitted Debenture interest total not deducted Taxation Paid: Taxation due January 1 Year 3 wrong/omitted Corporation tax for year not £35 or omitted Corporation tax due 31 December Year 3 wrong / omitted Taxation total not deducted

-1

1 1 1 1

1 1 1 1

Capital Expenditure and Finance Investments: Factory and Warehouse assets purchases not £300 Machinery assets purchased not £150 Delivery vehicles not £45 Total not deducted

1 1 1 1

Sales of Fixed Assets: Factory and Warehouse not £150 Machinery assets not £10 Delivery Vehicles not £8 Total not added

1 1 1 1

Equity Dividends paid not £30 Dividends £30 not deducted

2 1

Management of liquid resources and financing: Issue of share not (100,000 × 50p) = £50 Share premium not (100,000 × 20p) = £20 Ordinary shares not added Issue of debentures not £60 Debentures not added

1 1 1 1 1

Increase in Bank during the year wrong, not consequential

1

Extraneous items eg Revaluation -2, max -4 Items repeated from Reconciliation apply +/- rule Arithmetic slips -1 each

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Award marks lost

Penalties applied

QUESTION 1 – (continued) Part B Ratios – 10 Marks Mark as per solution. Wrong formula lose full award for ratio. Preference dividends in (c ) consequential on (b) Answer to part (d) is consequential on answer to part (c) -1 once

Percentage, times or p omitted

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Award marks lost

Penalties applied

QUESTION 2 Part A (a)

Realisation Account: Mark as per solution. If any one from factory Premises, Office Equipment, Delivery Vans, Stock, Debtors or VAT omitted or wrong

1

If error made in delivery vans taken over by Brown or White

1

If loss on realisation not shared between partners according to profit sharing ratios

1 -2 max -4

Extraneous items eg Loan, Bank overdraft (b)

Capital Account - White Opening Balance wrong, omitted Current Account balance wrong, omitted, wrong side Delivery Van wrong, omitted Loss on realisation wrong, omitted, not consequential Loan wrong or omitted Ignore any bank transfer to close Capital A/c

-1 1 1 1 1

Part B (a) and (b)

Mark as per solution

One mark is awarded for (120,000 × 40p) Application monies received in the Application and Allotment Account and the Bank, figure wrong or omitted

1

One mark is awarded for refund of Application monies received in the Application and Allotment Account and Bank account, (10,000 × 40p), figure wrong or omitted

1

If £56000 and £4000 are netted to £52000 in both Application and Allotment and Bank award 3 marks Do not accept £4000 netted against application money £48000

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Award marks lost QUESTION 3 Part A (a)

(i)

Calculation of Goodwill Calculation of number of shares purchased wrong Cost of shares wrong/omitted, not consequential on number of shares purchased

1

Value of company purchased not 80% Of £59,800

1 1

1

(a)

(ii)

Minority Interest not 20% Of £59,800

1 1

(b)

(i)

Post Acquisition Profits not £6,820 Less Profit and Loss Account Balance on acquisition £4,800 Not 80% of figure

1

(b)

(ii)

1 1

Unrealised Profits Mark-up not 50% of £3,600

2

Unrealised profits not 40% of Cost or consequential

1

(b)

(iii)

Minority Interest wrong or omitted

1

(b)

(iv)

Cash in transit wrong or omitted

1

(b)

(v)

Profit and Loss Account Balance Profit not £85,950 Post Acquisition profits not £1,616 or consequential on (b) (i) Unrealised profits not £720 or consequential on (b) (ii) Goodwill written off wrong, or not consequential on (a) (i)

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1 1 1 1

Penalties applied

Award marks lost

Penalties applied

QUESTION 3 – (continued) Part A (c)

Consolidated Balance Sheet Heading wrong or omitted Fixed Assets wrong Goodwill figures wrong or not consequential on (a) (i) Written off wrong, not consequential on (b) (v) Debtors figures wrong not consequential Bank figures wrong, not consequential Creditors wrong or omitted Accruals wrong or omitted Long Term Liabilities Debentures wrong any one omitted

-1 1 each 1 1 1 each 1 each 1 1 1 each

Financed by Ordinary Shares not £400,000 Share Premium not £40,000 Profit and Loss not £80,414 or consequential on (b) (v)

2 2 1

Minority Interest wrong, not consequential on (b) (iii) Minority Interest not the final figure

1 1

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Award marks lost

Penalties applied

Award marks lost

Penalties applied

QUESTION 4 Theory Questions Mark as per solution Two marks for each valid point

QUESTION 5

Mark as per solution (a)

Award 2 marks to any valid point

(b)

Award 1 mark for each area up to a maximum of 5 Award 1 mark for significance up to maximum of 5

Page 10

Award marks lost

Penalties applied

Question 6 Part A (a) (a)

Project A (i)

If termination costs ignored Accept 4.1 years

2

(ii)

Accept any reasonable explanation for 2 marks, if wrong Foregone cash flow is £112,000 – if wrong

2 1

(iii)

Average profit wrong ARR wrong, not consequential on average profit

1 2

Project B (i)

If termination costs ignored Accept 3.9 years

2 1

(ii)

Average profit wrong ARR wrong, not consequential on average profit

1 2

(b)

Project A 12% NPV Years 1-6 wrong Wind up not deducted or discounted Initial investment wrong/omitted Total Net Present Value omitted

(c)

1 each 1 2 1 mark

Projects A and B Consequential on (b), otherwise mark as per solution

(d)

(i)

Consequential on (b) and (c) Award 1 mark for correct advice and 2 marks for a valid basis/explanation

(ii)

Consequential on (b), (c) and (d) (i) If wrong/not consequential

2

Part B Award each variance amount 1 mark and each correct label 1 mark Amount wrong Label wrong, but amount correct

Page 11

2 1

Award marks lost

Penalties applied

Question 7 Part A (a)

(a)

(i)

(ii)

Good output of 26500kg – award 2 marks to calculation and 1 mark to allocation to all 3 elements Amount wrong ie 27000 Different amounts allocated to each element Work in progress wrong/omitted Final equivalent units produced wrong/omitted If normal loss 1000 ignore Transferred in cost wrong/omitted Costs for month – each one wrong/omitted Work in progress at start – any one wrong/omitted Scrap value of normal loss wrong/omitted not consequential Cost per equivalent unit wrong/omitted/not consequential Total cost per unit wrong/omitted Fixed costs included

(b)

Opening work in progress b/f not £5,425 Transferred in, materials, labour and overhead costs – any one wrong/omitted Abnormal gain/good output cost per unit wrong/not consequential Not the same cost per unit allotted to abnormal gain and good output Abnormal gain treated as a loss Normal loss wrong/omitted Closing work in progress wrong/omitted Fixed costs included

2 3 1 each 2

1 1 (max 2) 1 1 1 each 1 1 1 1 2 2 2 1 1 1

Part B All figures – mark as per solution except: Company overheads consequential on prime cost – if wrong / omitted/not consequential Profit taken consequential on notional profit – if wrong / omitted /not consequential Extraneous items -2, max -4 If damaged materials of £10000 entered lose 1 for £50,500

Page 12

3 2

Award marks lost

Penalties applied

Question 8 (a)

Mark as per solution

(b)

Consequential on (a) (i)

(ii)

(c)

Priority depends upon correct calculation of the contribution per machine hour Each contribution per machine hour wrong

Priority depends upon correct calculation of the contribution per kg Each contribution per kg wrong

1 max 2

1 max 2

Consequential on (a) and (b) (i)

Units required – each figure wrong/omitted/not consequential

1

(ii)

Kg required – each figure wrong/omitted/not consequential on (c) (i) Additional kg required omitted

1

(iii) Units reduced must be based on third priority in (b) (ii)

(d)

1 2

Consequential on (a) and (b) (i)

(ii)

Units required – each figure wrong/omitted not consequential Hours required – each figure wrong/omitted/not consequential on (d) (i) Additional hours required omitted

(iii) Change in Units produced must be based on the priority in (b) (i) Reduction in units wrong/omitted/not consequential

Page 13

1

1 1

2

Award marks lost

Penalties applied

Question 8 - Continued (e)

Consequential on (a) and (c) (i) Option 1 Units produced (from (c) (i)) wrong/not consequential Total contribution wrong/not consequential Royalties wrong/not consequential Fixed cost wrong/omitted Profit wrong/omitted

1 1 2 2 1

Option 2 Total contribution from Option 1 omitted/wrong Extra units wrong/omitted/not consequential Extra contribution wrong/omitted/not consequential Fixed costs wrong/omitted Profit wrong/omitted Advice consequential on working for Options 1 and 2 Advice not consequential Adequate reason not given

Page 14

1 1 each 1 each 2 1

2 2

Award marks lost

Penalties applied

Award marks lost

Penalties applied

Question 9 (a)

Award 2 marks and 1 mark per point as per suggested answers and for other relevant points where appropriate

(b)

Award 2 marks per point as per suggested answers and for other relevant points where appropriate Apply maximum marks per statement as per solutions

(c)

(i)

Award 2 marks per point as per suggested answers and for other relevant points where appropriate Maximum 6 marks

(ii)

Award 2 marks per point as per suggested answers and for other relevant points where appropriate Maximum 6 marks

Question 10 (a)

(i) and (ii)

(b)

Award 2 marks as per suggested answers and for other relevant points where appropriate

(c)

Award 2 marks per point as per suggested answers for each point correctly made Apply maximum marks per section as per solutions

Award 2 marks per point as per suggested answers and for other relevant points where appropriate Apply maximum marks as per suggested answers

[END OF MARKING INSTRUCTIONS]

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